A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.

An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-rate mortgage”.

Features:

Your interest rate and monthly principal and interest (P&I) payments will remain the same for an initial period of 5, 7, or 10 years, and then will adjust annually.

Loans available in a variety of longer terms.

Includes an interest rate cap that sets a limit on how high your interest rate can go.

Benefits:

Typically ARMs have a lower initial interest rate than on a fixed-rate mortgage.

The interest rate cap limits the maximum amount your P&I payment may increase at each interest rate adjustment and over the life of the loan.

May provide flexibility if you expect future income growth or if you plan on moving or refinancing within a few years.

Considerations:

Monthly principal and interest payments may increase when the interest rate adjusts.

Your monthly principal and interest payments may change every year after the initial fixed period is over.